Volatility-Adjusted Spreads refer to the bid-ask spreads for financial instruments that have been modified to account for the inherent price volatility of the underlying asset. In crypto markets, where volatility can be substantial, these adjusted spreads provide a more accurate representation of the true cost of trading, reflecting the risk a market maker assumes when quoting prices. This is critical for fair pricing in RFQ and institutional options trading.
Mechanism
The mechanism involves quantitative models that factor in real-time or historical volatility metrics, such as implied volatility for options or historical standard deviation for spot assets, into the calculation of the bid-ask spread. Higher volatility typically leads to wider adjusted spreads, compensating market makers for increased risk. These models dynamically update spreads to reflect changing market conditions, ensuring capital protection for liquidity providers.
Methodology
The strategic methodology for utilizing Volatility-Adjusted Spreads centers on robust risk management and precise pricing. Market makers employ
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